Rising home prices across Ontario are forcing home buyers to think of more creative ways to get into the market. One option that’s getting more popular is co-owing a house with a friend or relative.
Co-ownership refers to buying real estate with someone who is not your spouse or long-term partner. New data from Teranet, the provider of Ontario’s online property search and registration, shows condo units owned with parental assistance account for more than 14 percent. Most of these are first-time home buyers. Compare that to 2012 when only nine percent of condos were purchased with help from mom and dad.
Year-over-year, Teranet says the trend of pooling money together with a friend or family member, in order to buy a home, is growing. In fact, it’s been growing for years. Condos with only one person on title are now just 48 percent of the market, down from 58 percent in 2012.
Owning a house with a friend of family member requires all co-borrowers to be on the mortgage application. Some financial institutions now have products specifically aimed at first-time buyers eager to increase their home buying power. But before you start hunting for that perfect place to buy with your buddies, there are many factors to consider.
Seek Legal Advice
Talk to a real estate lawyer before you consider joining forces to buy your first house. Don’t leave this crucial step until the end. Real estate lawyer Ray Leclair is with LAWPRO. He says anyone thinking of buying a house under co-ownership should seek legal counsel first. LeClair says that with co-ownership, home buyer’s should “plan for the divorce because you’re getting into a business arrangement together and there is a certainty that it will end.” LeClair adds, how long each owner intends to own the house and how the sale of the house would work should be crystal clear.
Similar to when you rent, some residents will end up with a better bedroom or an ensuite bathroom. One of the owners might have a car and need access to the driveway while others take their bike or walk. These little things should be worked out before you buy. Who gets what is important to establish. As you can imagine, breaking up a co-mortgage over something trivial like parking could open a can of worms. LeClair says there should be a comprehensive maintenance agreement between all the parties that details how unexpected expenses will be dealt with. He also recommends setting up an emergency fund that all owners contribute to equally.
Ability to borrow more
Here’s something else to consider. If you plan to keep the property as an investment and get another mortgage later (e.g., for a second home), beware that your credit worthiness will be based on the entire mortgage. In a co-mortgage all borrowers are 100 percent liable for the payments, regardless of how much equity stake they each have. This can result in a bank offering you less mortgage then you expected on a second home.
Plan for the worst
In a co-ownership agreement the home title would most likely be tenants in common, rather than joint tenancy. With tenants in common, if one owner dies their share of the home becomes part of their estate. Each owner should have a will drawn up that clearly states what would happen in the event of their passing. It should detail who would be managing that estate and who would inherit their share of the property. These details should be shared with the other co-owner(s) so they know what to expect.
Buying a home is a major financial commitment. Ensure the people you are buying with realize this and are taking the purchase seriously. And make sure your real estate lawyer explains to all parties how the ownership agreement will work. Perhaps most important of all, always choose co-owners who share your financial values. This will improve the odds of a successful home buying experience with friends.